New Republican Math on Tax Cuts Doesn’t Equal Faster Growth

Congressional Republicans who rewrote the rules on measuring the economic effects of legislation may be disappointed at some of the results.

They want to prove a point they’ve been making for decades -- that tax cuts spur economic growth and send enough new money into U.S. government coffers to partly pay for themselves. The new rules implement what’s known as dynamic scoring, breaking with a previous system that doesn’t calculate the impact of policy changes.

The problem is that many of the tax bills the Republicans have promoted as job creators -- including the research credit and breaks for small businesses -- barely register under the macroeconomic models used by the nonpartisan scorekeepers in Congress.

And some of the bills that would partly pay for themselves were opposed by many Republicans, such as the 2009 economic stimulus and the 2013 immigration plan backed by President Barack Obama.

Dynamic scoring is a hotly partisan, if wonky, issue. Republicans call the change a more realistic approach to budgeting. Democrats contend that Republicans are cooking the books in favor of lowering taxes.

The reality may be more mundane.

Budget experts say most tax bills would have little impact on the economy, undercutting the Republican argument about future growth. Importantly, the economic models used in Congress reflect the assumption that tax cuts that add to the budget deficit now can drag down the economy later.

‘Big Stuff’

“When you realize the size of the GDP over 10 years, it’s gotta be really big stuff to have a measurable effect,” said Kenneth Kies, former chief of staff of the Joint Committee on Taxation, which produces estimates of tax bills.

“If you’re pushing some small-ball tax credit for some narrow group of sympathetic people, and it has zero macroeconomic consequences,” he said, it’s “slightly embarrassing to you if you’re out there giving speeches with great enthusiasm on how great this is for the economy.”

Take the research tax credit. The break, a legislative priority for Republicans and corporate America, has been temporarily extended since 1981, and companies say the on-again, off-again nature of the credit is counterproductive.

So last May, Republicans advanced a bill that would have removed the expiration date and made the credit more generous.

“This legislation is about jobs,” declared Eric Cantor, then the second-ranking Republican in the House.

Keeping Score

Not in the view of the official scorekeepers, who said the bill wouldn’t do much for the economy. It would promote some growth in the short run, diminished over time because of the hole it would put in the federal budget, they said.

“The effects of the bill on economic activity are so small and uncertain relative to the size of the economy as to be incalculable,” wrote the Joint Committee on Taxation.

The committee provided the estimate because of a previous Republican rule that required macroeconomic scores on some bills, to advise lawmakers.

The new rule only applies to bills with effects of at least 0.25 percent of the gross domestic product or those selected by top Republicans. The research bill was below that threshold.

Until now, the Joint Committee on Taxation and the Congressional Budget Office have assumed that legislation could change taxpayers’ behavior -- for instance, create a tax credit for solar panels and more people will buy them -- yet not the size of the economy.

Budget Deficit

The new rule will have its biggest effect, and generate the most controversy, if Republicans attempt to advance a tax plan that would increase the U.S. budget deficit by hundreds of billions of dollars over a decade under conventional estimates and that scores better under the new math.

Yet the conservatism of the Joint Committee’s models -- and their control by a nonpartisan chief of staff selected by Democrats -- also partly undermines Democrats’ argument that Republicans will generate exaggerated numbers.

Last year, the House passed a bill to let businesses immediately write off more than 50 percent of capital expenses, a major change that would benefit manufacturers and utilities.

“This bill is a jobs bill,” said Representative Pat Tiberi, an Ohio Republican, on the House floor in July. “It’s that simple.”

Federal Revenue

The Joint Committee projected that the measure would increase employment and federal revenue by less than 0.05 percent. The estimates showed that the bill would increase gross domestic product by about 0.2 percent over a decade. By contrast, an estimate from the Tax Foundation, a research group whose board of directors includes corporate executives, estimated that the same proposal would increase GDP by more than 1 percent.

Similarly, the economic effects of a 2014 bill to let small businesses write off all capital expenses were deemed “so small as to be incalculable.”

So what moves the needle?

A few measures Republicans don’t like.

The tax portions of Obama’s 2009 stimulus law, for example, were projected to boost growth by enough to pay for between 7 percent and 17 percent of the higher levies.

A 2011 analysis by the Joint Committee compared two tax-revamp plans, one that was revenue-neutral under conventional scoring methods and one that raised taxes by $600 billion over a decade. The result: In the long run, the tax increase was better for the economy on several measures, increasing GDP by at least 1.7 percent, compared with 1.1 percent for the other proposal.

Immigration Bill

A version of the Senate’s 2013 immigration bill -- opposed by many House Republicans -- would increase GDP by 3.3 percent in 2023 and reduce budget deficits, according to CBO.

The prototype for Republicans going forward is the tax-revamp plan released last year by Dave Camp, who was then chairman of the House Ways and Means Committee.

That proposal showed the promise of dynamic scoring and its limits.

Under conventional scoring rules, the Camp plan was revenue-neutral, with tax-rate cuts being offset by limits to breaks. Under the rules now in effect, Camp would have had an additional $50 billion to $700 billion over a decade, money that he could have used to cut tax rates further or soften some proposals opposed by banks and fellow Republicans.

Big Difference

There’s a big difference between $50 billion and $700 billion, and that’s where the dynamic scoring fight is now heading -- to a dispute over the models and assumptions that the Joint Committee on Taxation and the Congressional Budget Office will use.

The new rule doesn’t tell the scorekeepers what models and assumptions to use. And the old numbers will still be available, because the old-style data is used to create the new numbers. Any lawmaker can request a score from the Joint Committee on Taxation and make it public, and the scorekeepers should have the old-style scores readily available.

Republicans don’t intend to tell them what to do, said a congressional aide familiar with the process who spoke on condition of anonymity. No decisions have been made yet on which models and assumptions to use, said a second congressional aide.

The personnel will matter, too. Republicans aren’t likely to reappoint Doug Elmendorf as the CBO director, though they haven’t announced a replacement.

Republican tax writers said they will keep the current Joint Committee chief of staff, Thomas Barthold. He’s an economist and career employee who has had his job since May 2009 and is the longest-serving chief since 1977.

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“It’s hard to know how you convert a wide range of estimates into a single number,” said Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, which advocates for low-income families and opposes the rule change. “There’s great differences of opinion about these economic issues, so who ends up doing the estimates and what assumptions they use can end up affecting the results.”

(An earlier version of this story was corrected to remove an inaccurate description of 2014 tax proposal, under Big Difference sub-headline.)